Not the Time for Fear

“Be fearful when others are greedy and to be greedy only when others are fearful."

—Warren Buffett

The year closed with the longest running bull market in the history of U.S. equities staggering badly. The speed in which investors switched from bullish to bearish was striking and left the broad markets with the worst performance in a single quarter in roughly 10 years.

In the broad market, mega-cap growth stocks were among the hardest hit, with the FAANGs* down an average of over 23% for the period. However, few names escaped the downdraft, and attractively valued businesses of all sizes also struggled.

In the Know?

Given the broad-based selling, we think Mr. Buffett’s words are a timely reminder that in investing, short-term setbacks can often set the stage for future results.

This view may be contrary to the hand-wringing taking place in the financial media, but seems to reflect the attitude of many of the management teams of the businesses we own.

Across our Strategies we have seen healthy insider buying by executives in the past six months. We view these purchases as meaningful because they align management’s interests with shareholders, and we see them as a sign of confidence by those on the frontline.

Unsustainable?

These insiders may have an additional reason for optimism—the significant performance gap between attractively-valued businesses and those with lofty projected growth rates. Despite year-end selling, the gap between market darlings and orphans remains striking, as shown below, and is at levels not seen since the Tech Bubble.

A Decade of Pain for Value

Source: Cornerstone Macro, LP and Standard & Poor’s, 6/30/1995 to 12/31/2018
Chart shows the S&P 500 Growth and Value Indices divided by the S&P 500 Index.
Growth and value investing each have unique risks and potential for rewards and may not be suitable for all investors. A growth investing strategy emphasizes capital appreciation and typically carries a higher risk of loss and potential reward than a value investing strategy; a value investing strategy emphasizes investments in companies believed to be undervalued.
All indices are unmanaged. It is not possible to invest directly in an index. Past performance does not guarantee future results.

We have been surprised by the stubbornness of the performance gap but believe new economic uncertainty will cause investors to seek attractive multiples when comparing investment opportunities.

Much of 2018 was humbling for committed value investors as the markets once again rewarded momentum and the promise of future growth over balance sheet strength and compelling valuations. In the face of this challenge we remained unwavering in pursuit of investments that fit with our principles.

As inflated former market darlings continue to wilt, we believe our commitment to a valuation-first approach to investing will be rewarded.

An investor should consider the Funds’ investment objectives, risks, and charges and expenses carefully before investing or sending money. This and other important information may be found in the prospectus (pdf). To obtain a print prospectus, call 800-432-7856. Please read the prospectus carefully before investing.

Investing involves risk, including the potential loss of principal.

There is no guarantee that a particular investment strategy will be successful.

Value investments are subject to the risk that their intrinsic value may not be recognized by the broad market.

As of 12/31/2018, Heartland Advisors on behalf of its clients held approximately 0.00%, 0.00%, 0.00%, 0.00%, and 0.00% of the total shares outstanding of Facebook, Inc., Apple Inc., Amazon.com, Inc., Netflix, Inc., and Google (Alphabet Inc.), respectively.

Statements regarding securities are not recommendations to buy or sell.

Portfolio holdings are subject to change without notice. Current and future portfolio holdings are subject to risk.

The statements and opinions expressed in the articles or appearances are those of the presenter. Any discussion of investments and investment strategies represents the presenters' views as of the date created and are subject to change without notice. The opinions expressed are for general information only and are not intended to provide specific advice or recommendations for any individual. Any forecasts may not prove to be true.

Economic predictions are based on estimates and are subject to change.

Heartland Advisors defines market cap ranges by the following indices: micro-cap by the Russell Microcap®, small-cap by the Russell 2000®, mid-cap by the Russell Midcap®, large-cap by the Russell Top 200®.